Message from ISM: Recession Likely, Not Inevitable

Economics Group of Wells Fargo Bank, N.A. Summary The ISM notched a ninth straight month in contraction in July as employment fell to a 3-year low. Yet new orders rose to a 9-month high as production also improved. The signal from the ISM is bleak, but the 1990s mid-cycle slowdown was just as bad. Recession is likely but not inevitable. A Rebel Just for Kicks, Let Me Kick It Like It’s 1996 The ISM manufacturing index came in at 46.4 in July, marking the ninth consecutive month of contraction, the low point of which was last month when it registered at 46.0. At a time when the soft-landing camp is welcoming waves of new-comers, the ISM and other measures of manufacturing activity have offered safe harbor for those convinced the U.S. economy is headed for recession. This bellwether seldom falls this deep into contraction territory or stays below 50 for this long without being immediately followed by a recession. There is one exception. In fact, if there were a period in recent U.S. economic history that might serve as a road map of sorts for today’s Fed, it would be the mid-cycle slowdown of the 1990s. In that era, the ISM notched 10 consecutive months below 50 with a cycle low of 45.5 in 1996 (chart). That is one month longer and half a point lower at the trough than the current cycle. The takeaway here is that recession remains likely, but not inevitable. A key risk is that the manufacturing sector has proven to be more vulnerable to higher interest rates than other parts of the economy, such as the labor market and consumer spending. To the extent that those sectors continue to flourish, it implies higher rates for longer and that could be trouble for manufacturing. READ FULL ARTICLE >>